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If there was a Dollar Crash, what would people trade into?

November 15, 2010 Comments off

I keep asking this question, I have yet to hear a good answer.  For the U.S. Dollar to crash, some other market must absorb all of that selling with lots of buying.

What market would that be?  Now, as a practical issue, this market must be large enough to absorb several trillion Dollars of buying, perhaps as much as 4 trillion. Only a few markets could potentially handle this much buying.  Even spread across many markets, this much buying is too much.

So let us be more precise in our question.  If the U.S. Dollar crashed, what gigantic asset class(es) would have a the largest rally in human history?

My basic take is that there is not any asset class, or combination of asset classes, large enough to absorb this much buying.

Emerging markets simply do not have enough value to justify a tripling of their current valuations.  Ditto on the non-US stock markets. Real Estate is radioactive across the globe in developed countries, and not large enough in emerging markets.  Plus, anyone that’s ever been outside the U.S. knows – our buildings are really, really nice compared to other places.

The total GDP of the BRIC countries (in PPP) is close enough to the total GDP of the US that they could potentially absorb a massive amount of buying.  However, this would entail at least three impossible things:

  1. A doubling of their stock markets
  2. A doubling of their currencies values
  3. cutting bond yields in half for these countries
  4. using Brazilian Reals, Russian Roubles, and Indian Rupees as reserve currencies

Numbers 2 and 4 are particularly impossible.  If their currencies went up this much, these export dependent countries would be plunged into deep, deep recessions.

James Grant – a very smart man – makes this horrible mistake in the pages of the New York Times.  The U.S. Dollar cannot plunge without something else having a massive rally.  But he bases his entire article on something impossible, or close enough to impossible that it probably won’t happen in my lifetime of 50-60 more years.

He recommends gold as a way to create a sound dollar.  I just do not know what the point of a sound dollar program is either, but that is beside the point.  He is afraid of monsters under the bed and in the closet, laying in bed quaking in fear like a 5 year old, calling out for daddy gold to rescue him from his imagination.

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